Irish Central Bank Says Euro Economy Shrank in Second Quarter

The Irish central bank said the euro-region economy probably contracted in the second quarter and the sovereign debt crisis could delay a recovery.

“Economic activity stagnated in the euro area at the turn of the year and available indicators suggest that the economy shrunk further in the second quarter of 2012,” the Dublin-based institution said in its quarterly bulletin published today. “The widespread deterioration in sentiment and the high levels of uncertainty threaten to further delay the gradual recovery forecast for the second half of this year.”

With economic confidence in the euro area declining, unemployment at the highest on record and bond yields elevated in Spain and Italy, policy makers are weighing options to step up their response to the crisis. European Central Bank President Mario Draghi is under pressure to announce new measures after he pledged last week to do whatever it takes to preserve the euro.

“The recent intensification of the sovereign debt crisis and the sharp increase in uncertainty highlights the significant risk that problems in the financial sector can spill over to the real economy,” the Irish central bank said. “The risks to the euro-area outlook are tilted to the downside and remain dominated by concerns about sovereign debt, but also include a possible slowdown in the world economy.”

The International Monetary Fund on July 16 cut its 2013 global growth forecast to 3.9 percent from 4.1 percent, citing Europe’s fiscal crisis and slowing activity in emerging markets from China to India. The IMF predicts global growth of 3.5 percent this year.

“Growth expectations for 2012 are moderate and continue to be characterized by an uneven performance, with weak growth expected in advanced economies, while emerging markets are set to continue to expand at a faster pace, despite moderating recently,” the Irish central bank said. “If the positive global situation can be maintained, it will help boost euro-area export growth over the forecast horizon, while accommodative monetary policy and declining energy prices should help support domestic demand.”

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